No doubt a healthy democracy requires competition between multiple parties. And although I am avowedly liberal in my political views, I recognize the value of conservative thought and the necessity of keeping the worst liberal instincts in check.

But this point of view requires an opposition party that has the good of the country as its aim and is capable of rational action.

My reading of contemporary Republican thinking is that there is no chance of any attempt to arrest adverse long-term fiscal trends should they return to power. Moreover, since the Republicans have no interest in doing anything sensible, the Democrats will gain nothing from trying to do much either. That is the lesson Democrats have to draw from the Clinton era’s successful frugality, which merely gave George W. Bush the opportunity to make massive (irresponsible and unsustainable) tax cuts…. Indeed, nothing may be done even if a genuine fiscal crisis were to emerge. According to my friend, Bruce Bartlett, a highly informed, if jaundiced, observer, some “conservatives” (in truth, extreme radicals) think a federal default would be an effective way to bring public spending they detest under control….

To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”. Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue…. Supply-side economics… allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?… [T]he Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective….

[T]he theory that cuts would pay for themselves has proved altogether wrong. That this might well be the case was evident: cutting tax rates from, say, 30 per cent to zero would unambiguously reduce revenue to zero. This is not to argue there were no incentive effects. But they were not large enough to offset the fiscal impact of the cuts…. Indeed, Greg Mankiw, no less, chairman of the Council of Economic Advisers under George W. Bush, has responded to the view that broad-based tax cuts would pay for themselves, as follows:

I did not find such a claim credible, based on the available evidence. I never have, and I still don’t.

Indeed, he has referred to those who believe this as “charlatans and cranks”. Those are his words, not mine, though I agree. They apply, in force, to contemporary Republicans, alas….

The evidence shows, then, that contemporary conservatives (unlike those of old) simply do not think deficits matter…. But this is not because the supply-side theory of self-financing tax cuts, on which Reagan era tax cuts were justified, has worked, but despite the fact it has not…. So, when Republicans assail the deficits under President Obama, are they to be taken seriously?… Yes, they are politically interested in blaming Mr Obama for deficits…. But no, it is not deficits themselves that worry Republicans, but rather how they are caused: deficits caused by tax cuts are fine; but spending increases brought in by Democrats are diabolical, unless on the military. Indeed, this is precisely what John Kyl (Arizona), a senior Republican senator, has just said:

[Y]ou should never raise taxes in order to cut taxes. Surely Congress has the authority, and it would be right to — if we decide we want to cut taxes to spur the economy, not to have to raise taxes in order to offset those costs. You do need to offset the cost of increased spending, and that’s what Republicans object to. But you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans

What conclusions should outsiders draw about the likely future of US fiscal policy? First, if Republicans win the mid-terms in November, as seems likely, they are surely going to come up with huge tax cut proposals (probably well beyond extending the already unaffordable Bush-era tax cuts). Second, the White House will probably veto these cuts, making itself even more politically unpopular. Third, some additional fiscal stimulus is, in fact, what the US needs, in the short term, even though across-the-board tax cuts are an extremely inefficient way of providing it. Fourth, the Republican proposals would not, alas, be short term, but dangerously long term, in their impact.

Finally, with one party indifferent to deficits, provided they are brought about by tax cuts, and the other party relatively fiscally responsible (well, everything is relative, after all), but opposed to spending cuts on core programmes, US fiscal policy is paralysed. I may think the policies of the UK government dangerously austere, but at least it can act.

This is extraordinarily dangerous. The danger does not arise from the fiscal deficits of today, but the attitudes to fiscal policy, over the long run, of one of the two main parties. Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed. If so, that would be the end of the US era of global dominance. The destruction of fiscal credibility could be the outcome of the policies of the party that considers itself the most patriotic.

In sum, a great deal of trouble lies ahead, for the US and the world.

Where am I wrong, if at all?

As Delong notes:

Nowhere. He is not wrong.

I think that there is little doubt that, should Republicans come to power, the global dominance of the U.S. will come to an end. The public is simply unwilling to bear any costs to keep our infrastructure, educational institutions, and social capital healthy. And that ignorance and lack of will is constantly reinforced by the Republican Party. The so-called tax revolt that Republicans have been exploiting for years is a cancer that will eviscerate our prosperity.

Stephen Williamson: …Ed Prescott did pathbreaking work in the economics profession, and his Nobel prize is well-deserved. His work with Finn Kydland made macroeonomists more quantitatively disciplined, and serves as a benchmark for most of the work done in macro in the last 30 years, including New Keynesian economics, models with financial frictions, and incomplete markets models. However, I doubt that there were any people in the room yesterday who took Ed seriously. Ed’s key points were: 1. Monetary policy does not matter. 2. Financial factors are the symptoms, not the causes, of the recent downturn. 3. The recession was due to an Obama shock, i.e. labor supply fell because US workers anticipate higher future taxes. Bob Hall suggested that this would require a Frisch labor supply elasticity of about 27, which seems ridiculous. However, Ed stuck to his guns and thus seemed – well, ridiculous. As a basic framework, the real business cycle model is obviously useful – you can’t argue with a basic framework of preferences, endowments, technology, and optimal choice. I think we know by now, though, that financial factors have a lot to do with what we are measuring as TFP (total factor productivity). We certainly should not be listening to suggestions that central banks are irrelevant – these institutions can clearly reallocate resources in a big way when they want to.

Prescott isn’t alone in pushing the “Obama shock” idea. The claim is that the recession is due to a labor supply shock where workers collective decide to work less due to one government program or another, or some type of technology shock.

So let me get this straight. There are professional economists who think that, beginning in late 2007 when Obama was still a U.S. Senator, substantial numbers of people decided to stop working because they were afraid that in 2009he would become President and their taxes would increase?

I would guess a third-grader would know that is ridiculous.

First of all, I don’t know anyone who makes a decision about whether to work or not based on future tax rates. Secondly, if I did make my decisions to work based on future taxes and I thought taxes would go up, wouldn’t I work harder now to take advantage of the lower present rates and protect myself against future losses? Finally, one of the first things Obama did upon taking office was lower taxes. So wouldn’t these workers be scrambling to find jobs now to take advantage of the low tax rates while they last?

What is going on here is that right-wing economists have a lot invested in the “efficient markets hypothesis”—the view that free markets always get the allocation of resources and hence prices right. When the market doesn’t get it right they have to invent some ad hoc explanation of the anomaly that protects their pet theory.

Obama sends right-wing ideologues over the edge. Their brains are so addled they cannot come up with even a remotely plausible hypothesis.

The most recent defeat of a jobs bill in the Senate will have far reaching consequences beyond the loss of benefits for the unemployed. The bill included aid to the states, which will not be forthcoming. As Ed Kilgore points out:

Unfortunately, 34 states planned on receiving that money, and its failure to materialize is going to create a whole new round of state budget crises. In many states, we can expect Medicaid cuts and/or reductions in other state spending, quite likely including layoffs of teachers and other public employees. That’s why most Republican state officials did not share the happy-talk of their brethren in Washington about opposing “bailouts of the states.”

State budget cuts will have a baleful effect on the economy, and vague conservative talk that “shringing government” will somehow produce private-sector growth is going to be exposed as illusory.

Kilgore thinks there may be a silver political lining to the Republicans’ refusal to do anything to stimulate the economy.

But there could be political consequences as well, as voters begin to realize that there is no big pot of money labeled “waste, fraud and abuse” that can be tapped to balance state budgets, much less to fund the high-end personal and corporate tax cuts that many Republicans continue to call for in the latest incarnation of the discredited theory of supply-side economics.

In other words, the anti-government populism that conservatives are counting on as electoral magic this November may lose some of its appeal when reality sets in. And Democrats should be quick to point out there is no such thing as a free “austerity” lunch.

Unfortunately, there is no evidence that the public “gets it”. Reality “set in” a long time ago with the financial crisis and consequent recession that was wholly a product of a bankrupt conservative ideology and Republican mismanagement. Yet polls show that voters are poised to put Republicans back in power in the November mid-term elections.

Conservative beliefs continue to circulate in an endless feedback loop, immune to counter-example or evidence and supported by nothing but empty nostrums about “freedom”, “big guvment”, and “free markets”.